Toll Brothers Release Disappointing Earnings

Toll Brothers (Ticker Symbol: TOL) released a disappointing earnings and revenue report that was released late this week.  The Horsham, Pennsylvania based company reported an earnings per share miss of $1.00 per share vs. $.1.26 per share they earned the same period this time last year. Additionally, the home building giant reported net income of $146 million which was down from $193 million this time last year.  

Demand for homes has been weaker, but lower mortgage rates, a strengthening job market, as well as a smaller supply of new and existing homes, has enabled Toll Brothers to increase its prices. Toll Brothers generally caters to clients who can afford homes that cost roughly $2 million or more, and the company did see the average price of sold homes increase by 3.4%.  Three homebuilding stocks were on the receiving end of an analyst upgrade receiving “buy” recommendations last week from Suntrust, pointing to strong growth potential within the sector.  

Above is the longer-term weekly chart of Toll Brother’s stock.  The stock was stuck in a three-year-long horizontal price channel.  Horizontal Channels are usually viewed as areas of indecisiveness between buyers and sellers.  Toll Brother’s stock was at a point where supply and demand were relatively balanced and the price was trading within a certain range, in Toll Brother’s case, between the $30.00 and $40.00 dollar price levels. In the first quarter of 2016, the stock broke out of that range and put in the most oversold condition in the Relative Strength Index it has had in three years.   

Toll Brothers Stock broke through its downtrend in the fourth quarter of 2016, led by strong earnings and guidance reports.  The stock then reclaimed both its 100 and 200-day Moving Averages and proceeded to rally over 50%, before finding some resistance just below the $53.00 price. The stock began to top, forming a bearish divergence pattern, as indicated on the chart by the green lines, where the stock makes a higher high in price but the Relative Strength Index makes a lower high.  Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal, as occurred in Toll Brothers case. In the first quarter of 2019, the stock found some resistance at the 200-day Moving Average and the stock slightly pulled back and is currently finding support at the 100-day Moving Average near the $36.00 price level.  

(Chart above courtesy of ​www.tipranks.com​)  

Based on a survey of nine analysts offering 12-month price targets, the average price target for Toll Brother’s stock is $38.14. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $36.14. 

The recent stock market volatility, slowing economic growth, and declining orders are all hinting at weaker demand for new homes. The U.S.-China trade war has caused Chinese buyers to act more risk-averse with their investments within the U.S. real estate market.  Investors in the space should look to KB Homes (Ticker Symbol: KBH) earnings release on September 25th for fresh news within the sector.